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Thursday, 29 November 2018 11:56
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Inclusive growth in Vietnam in integrated context

(LLCT) - Over the years, Vietnam has achieved outstanding economic development achievements. However, the country is entering a new development stage with the challenges of the "middle-income trap", the economy is still unsustainable, the quality of growth and competitiveness of the economy is low and increasingly uneven among sectors and localities, the inequality of income also increases. In order to ensure the sustainability and inclusiveness of economic growth, solutions need to be devised to develop an advantageous sector, to improve reasonable allocation and transparency of public resources; to improve productivity; and to ensure educational development meets the Industrial Revolution 4.0.

1. Inclusive growth in Vietnam: some challenges

Inclusive growth is a new term that has been used over the last few years and has been included on many national agendas. According to the Fulbright Economics Specialist, the term “inclusive growth” was first mentioned in the reports of the United Nations Development Program (UNDP). Total growth is driven by sustainable growth on the basis of creating opportunities for all different actors and for all economic sectors in society to participate and be reapplied for their contribution(1).

Looking back on the recent development, in spite of the achievements, Vietnam’s economy has not developed sustainably; the quality of growth, productivity and competitiveness of the economy is low. Because Vietnam’s growth model is primarily neutrality in distribution, the deceleration in growth indicators comes from a decline in growth. Economic growth declined significantly, from an average of 6.72% in 1986-2005 to only 6.05% in the period 2006-2014. The decline in recent growth has been attributed to the growing macroeconomic instability in the late 2000s. This has worsened the weaknesses inherent in the structure of the economy in key factors such as institutions, infrastructure and human resources.

In 2007, Vietnam’s accession to the WTO was expected to be an important step towards global integration, opening up great opportunities for the country’s development. But that moment also coincided with the last phase of the global economic boom, with global imbalances identified as the main cause of the 2008 crisis. The huge global capital flows seeking attractive investment opportunities have created a huge asset bubble, especially real estate bubbles in the United States and some European countries. Foreign investment in Vietnam soared in the second half of the 2000s. Large capital inflows into Vietnam resulted in excess liquidity in circulation, thus inflating assets such as securities, real estate, gold and foreign currencies, causing many negative consequences.

The first manifestation was the shift from savings to over-consumption, especially among the rich. The gap between savings and investment in 2001-2005 from 1.83% of GDP rose to 7.51% in 2008-2010(2), causing macroeconomic instability. Property bubbles stimulated speculative behavior throughout society, from investors, state-owned enterprises as well as private enterprises and the public. Property prices rose rapidly. The vast majority of financial, human and material resources were displaced rather than being poured into the real economy to enhance production capacity, improve technology and skills, and promote the competitiveness of the country, which shifted focus to speculative purposes.

With so much money in circulation, many commercial banks have loosened lending standards and let loose risk management. Many substandard loans were also approved and a significant amount of money was poured into speculative activities. A series of bank drafts over the past time was a testimony to the loosening of monetary management.

Public spending increased from an average of 27% of GDP in 2001-2006 to 28.9% of GDP in the period 2007-2010 and 29.2% of GDP in the period 2011-2015. Public investment spread over too many projects, leading to delays in construction and capital formation many times higher than expected. Public debt to GDP increased significantly from 51.7% in 2010 to 61% in 2015, of which government debt accounted for 49.2%. Government debt was 10.9%; local government debt was about 0.9%. Vietnam is one of the countries with the highest debt-to-GDP ratio, up about 10% in the past five years, despite impressive economic growth. If the trend continues, Vietnam will face serious concerns about fiscal sustainability as well as its overall growth target(3).

Vietnam is entering a new phase of development with the challenges of the “middle-income trap”. The consequences of the global financial crisis in 2008 have exposed the weakness of Vietnam in the development of its current growth model. Vietnam’s economic growth and progress in human development have begun to decline. In fact, in the period 1990 - 2005, the major part of the growth benefited the people. In the early stages of the opening era, the main income of the people was from work and the difference in wealth was mainly due to differences in the skills of workers. As the economy develops, high income groups accumulate assets as well as invest more in assets to generate income from them. In the period from 2010 up to now, the income gap between the population groups is largely due to the difference in income from property (real estate, stocks, deposits, ownership of land and production tools), making for inequality. The gap between the rich and the poor is getting wider. This is reflected in the GINI coefficient. According to the GSO, in 1993, Vietnam’s GINI index of 0.33 means that 33% of the “bread” was not distributed evenly. By 2016 this figure was up to 44%. corresponding to the 0.44 point). According to many researchers, if the GINI coefficient was 0.5 or higher, it was dangerous because it accounted for social unrest and big difference between the rich and the poor. Statistics also show that in 1993, the gap between the richest 20% of the population compared to the 20% of the poorest quintile was only about 4.4, but by 2016 it rose ten times. However, this is just a relative figure, for the real data may be much higher because the income of the rich is very difficult to measure. Studies on inequality also show that in the previous period, the main causes of inequality were differences between different social groups, such as urban-rural, Kinh people-ethnic minority, etc., but now inequality is happening internally among groups. This is a challenge that the Government needs to address in order to ensure sustainable growth and social equality.

The Vietnam Human Development Report 2015 on Growth covered by the Vietnam Academy of Social Sciences in collaboration with the United Nations Development Program shows that: In 2013, public spending on social security in general was 2.8% of GDP. Social support alone accounted for only 0.4% of GDP. This situation, combined with the limited coverage of social assistance, led to the “omission of the middle” - the near-poor and the lower middle classes who often work in the informal sector. By 2013, 62.7% of the total work force was in the informal sector. By not having access to the social security system, these (self-employed and unpaid labor) can be considered “vulnerable” when dealing with shocks and having very little possibility of investing for the future. The data on employment status by gender show that there are significant differences between men and women. In 2013, women accounted for 41.1% of total paid employment but accounted for 64% of unpaid family workers. 31.4% of the total number of employees were employed on a verbal or contractual basis. The proportion of male and female workers was the same, but the proportion of female workers without contracts was higher than that of male workers (24.4% for women and 16% for men)(4).

The underlying factor that limits the sustainability and inclusiveness of growth is the uneven growth rate between sectors and localities. Moreover, employment and livelihoods are the most important means for people to participate in the economy. Employment growth over GDP growth is low, even declining. Large disparities in asset holdings, including land and unequal access to quality goods and services such as education, health, credit, infrastructure and social protection have prevented the poor from fully participating in the benefits of growth, thereby exacerbating income inequality. Access to health services and the type of services enjoyed differ significantly among socio-economic groups in Viet Nam. There are still about 34 million people who do not receive any type of health insurance, most of them are near poor households, peasants, dependents, laborers and non-state enterprises. In addition, richer households receive higher quality health care services than poor households.

The nature of globalization and the movement of global value chains is also a limiting factor in the coverage. This process may have adverse effects on income distribution. Specifically, technological advances often create structural changes that are beneficial to educated people, thereby widening the income gap between skilled and unskilled laborers. Rural-urban distances may be exacerbated as cities take advantage of economies of scale. The inequality of initial capital allocation can also exacerbate inequalities, as the return on investment can grow faster than the profit from low skilled labor.

2. Some solutions to implement the growth model in Vietnam

Firstly, there should be a focus on the development of new comparative advantages in the regional and world economies.

It is necessary to choose the industry that has the advantage and not only choose the development industry following the “jackfruit” model as before. After that, it is necessary to concentrate on building the value chain, organizing the commodity line with the infrastructure attached to the service, attaching technical standards and adding new value.

For key economic regions, consideration should be given to the issuance of competition policies with regional and international economic centers. Clearly, regional links must be in the direction of the knowledge economy and access to the 4.0 Industrial Revolution, the development of high tech content industries, creating great added value, fostering the dynamics of industrial zones under the new growth strategy, as a breakthrough in economic development. We need to study other countries and establish some cross-border economic linkages with some neighboring countries; form pairs of border gates to increase economic cooperation effectively.

For regions with difficult socio-economic conditions, it is necessary to have policies aimed at attracting investment in sectors exploiting comparative advantages in line with natural and social conditions; to clarify the function of ecological preservation, cultural preservation and political security so that there are comprehensive regional integration policies that ensure the above functions.

Secondly, public resources should be allocated and managed in a transparent and accountable manner, ensuring maximization of the development impact of national resources.

To that end, macroeconomic policies should create and maintain a healthy, attractive and equitable macroeconomic environment, instead of stimulating growth by encouraging incentives that are both wasteful and ineffective while distorting the market, misallocating resources and over-intervening in the economy. Monetary policy should focus on controlling inflation, stabilizing the value of the Vietnamese dong (VND) and increasing the competitiveness of the banking system, improving access to credit. Fiscal policy should reduce the burden on the state budget to reasonable levels on the principle of equality, increase the ability to accumulate for the economy, and control the state budget deficit and debt through tight fiscal discipline. Price policy should be planned and implemented in principle and in line with the full and modern market rules coupled with open investment policies, minimizing administrative barriers to access and leaving the market. Environmental protection policies must promptly prevent environmental degradation for the purpose of economic growth.

In order to continue to improve the level of transparency and accountability in the allocation and management of public resources, it is necessary to publish the draft budget submitted to the National Assembly on a portal. At the same time, the Government should publish the audit report on time; make the mid-term report accurate and timely, and increase the people’s participation in the process of state budget development. A mechanism should be established for government agencies and the public to exchange views and discuss budget issues in the process of state budget development; or establish and implement a public disclosure mechanism between the legislature and the people or representatives of social organizations in the budget preparation and approval process.

Thirdly, labor productivity and product quality should be improved as an organic part of the country’s growth strategy.

To improve labor productivity, the Government should prioritize investment in education and training to improve skills and knowledge. In fact, one of the most important factors leading to low labor productivity in Vietnam is the quality of education and training and the lack of human resources of high quality training, not emphasis on retraining and advanced training.

Total Factor Productivity (TFP) should be increased. TFP reflects the results of production by improving the efficiency of using capital and labor based on technological innovation, rationalizing production, improving management and improving labor skills. TFP is increasingly important in economic growth. In 2017, TFP’s contribution to GDP growth was estimated at 44.13%, higher than in 2016 (40.68%) and much higher than the 2011-2015 average (33.58%). Therefore, in the coming times, attention should be paid to improving the TFP factor.

The business community, especially small and medium enterprises, should be encouraged to innovate and support the shift from low value-added activities to high value-added activities by increasing human capital and increasing spending on research and development. At the same time, it is necessary to set up a technical advisory committee composed of industry experts, managers and business representatives of Vietnam to identify Vietnamese enterprises in comparison with those at the front line of technology and institutional support measures. The committee regularly evaluates policy objectives against the goal of catching up and leapfrogging technology in existing markets and through innovative linkages.

It should actively integrate into international markets, effectively exploit opportunities from FTAs, especially new generation FTAs such as the Comprehensive Partnership Agreement and the Trans-Pacific Partnership (CPTPP), the Free Trade Agreement Vietnam - EU (EVFTA) and the Comprehensive Economic Partnership Agreement (RCEP), etc. 

Fourthly, strong reform of the education system should be made and there should be training to adapt to the Industrial Revolution 4.0

Technology and people are the two most important elements in endogenous growth models. Unlike other inputs (capital, labor, land, natural resources) that are always limited by boundaries, these two factors can increase without being blocked by any ceiling and are hence the key to the country escaping the middle income trap. This is the most important content in the development strategy of successful countries. Therefore, it is necessary to have an education and training strategy in the following direction: strong support for science and technology (STEM) through effective institutions and policies; promoting publicity to raise awareness of young people, leading students to study STEM; nurturing STEM skills from a young age, beginning with kindergartens, through appropriate teaching methods such as robotics; studying advanced countries in the delivery of programming into the curriculum from the lower classes; encouraging lifelong learning and continuing learning based on the use of new learning technologies based on the Internet; and dramatically changing the way  of  studying and teaching English in schools, with specific performance monitoring indicators. There should be a mechanism to encourage firms and educational institutions to work together to bridge the gap between newcomers’ skills and shorten the time it takes to find a job that suits their professional interests and businesses, to shorten the time and reduce the cost of recruiting.

Fifthly, a modern social protection system should be built.

Social assistance should be defined as ensuring the exercise of the right to social assistance, not humanitarian activity. Social support policy is a measure and tools of action to achieve the objective of ensuring the safety of life for the portion of the population in unfortunate or difficult circumstances. Accordingly, social support policies based on the life cycle will ensure consistency, in harmony with other social security policies, especially social insurance policies, health insurance and loophole insurance.

Social assistance is a component of socio-economic policy, so the process of perfection and development must be based on the process of development of the socialist-oriented market economy. The development of the grassroots network provides social assistance services in line with the socio-economic development conditions of the country, improving the quality of social assistance services to access advanced countries in the area, to meet the needs of people’s support, aiming at the development of social equity and efficiency.

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Endnotes:

(1) The problem of growth and unequal growth, tuoitre.vn

(2) Vietnam’s implementation of the Five-year Socio-Economic Development Plan 2011-2015: Half way back, report to the Academy of Social Sciences Vietnam in September, 2013, within the framework of capacity building project for development of human development in Vietnam (HDPM) by UNDP. sponsor.

(3) Report on “Vietnam Public Expenditure Review: Fiscal policy towards sustainable, effective and equitable” by the Government of Vietnam in collaboration with the World Bank in 2017.

(4) World Bank Report “Review of Vietnam’s Economic Development”, Hanoi, 2014, pp. 29-30.

Dr. Ho Thanh Thuy

Institute of Political Economics, Ho Chi Minh National Academy of Politics

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